A tax assessment had been issued for FY 2013 resulting in additional taxes of to CZK 227,162,210. At first the tax administration disputed that the applicant had purchased 1 TB SSDs for the purpose of earning, maintaining and securing income. It therefore concluded that the Starcom Internatioal had not proved that the conditions for tax deductions were met.
On appeal, the tax administrator changed its position and accepted that all the conditions for tax deductions were met, but now instead concluded that Starcom Internatioal was a connected party to its supplier AZ Group Czech s.r.o. It also concluded that the transfer prices had been set mainly for the purpose of reducing the tax base within the meaning of Section 23(7)(b)(5) of the ITA. It was thus for the tax authorities to prove that Starcom Internatioal and AZ Group Czech s.r.o. (‘AZ’) were ‘otherwise connected persons’ and that the prices agreed between them differed from those which would have been agreed between independent persons in normal commercial relations under the same or similar conditions.
Judgement of the Regional Court
The Court allowed the appeal and decided predominantly in favour of Starcom Internatioal.
“It can therefore be summarised that for the application of section 23(7) of the ITA it is necessary to prove that they are related persons within the meaning of the Income Tax Act, while respecting the case law cited above. A further condition is that the tax authority must prove that the prices agreed between these persons differ from the normal prices that would have been agreed between independent persons in normal commercial relations under the same or similar conditions. It is then up to the taxable person (if he wishes to avoid adjusting the tax base) to explain and substantiate the difference found to his satisfaction.”
“Since the applicant was fully successful in the proceedings, it was entitled to the costs of the proceedings, which the court ordered the defendant to pay, in accordance with Article 60(1) of the Civil Procedure Code. The applicant’s costs of the proceedings consist of the court fee paid for filing the action in the amount of CZK 3,000, as well as the lawyer’s fee in accordance with Decree No 177/1996 Coll. in the amount of CZK 3,100, pursuant to Article 7(5) in conjunction with Article 9(4)(d) of Decree No 177/1996 Coll, for three acts of legal service – preparation and acceptance of representation and drafting of the application and the reply to the defendant’s statement of defence, as well as three times the overhead allowance of CZK 300 for each of those acts of legal service pursuant to Article 13(4) of the Ordinance and VAT on those amounts, with the exception of the court fee paid pursuant to Article 57(2) of the Civil Procedure Code. The Court ordered the defendant to pay the costs reasonably incurred in the total amount of CZK 15 342 to the applicant’s representative pursuant to Section 149(1) of Act No 99/1963 Coll. of the Civil Procedure Code in conjunction with Section 64 of the Code of Civil Procedure.”